Monday, February 13, 2012

The Distorting Effects of Transportation Subsidies

Although critics on the left are very astute in
describing the evils of present-day society, they usually fail to
understand either the root of those problems (government intervention)
or their solution (the operation of a freed market). In Progressive
commentary on energy, pollution, and so on—otherwise often quite
insightful—calls for government intervention are quite common. George Monbiot, for instance, has written
that “[t]he only rational response to both the impending end of the Oil
Age and the menace of global warming is to redesign our cities, our
farming and our lives. But this cannot happen without massive political
pressure.”
But this is precisely backward. Existing problems of
excess energy consumption, pollution, big-box stores, the car culture,
and suburban sprawl result from the “massive political pressure” that
has already been applied, over the past several decades, to “redesign
our cities, our farming, and our lives.” The root of all the problems
Monbiot finds so objectionable is State intervention in the marketplace.
In
particular, subsidies to transportation have probably done more than
any other factor (with the possible exception of intellectual property
law) to determine the present shape of the American corporate economy.
Currently predominating firm sizes and market areas are the result of
government subsidies to transportation.
Adam Smith argued over 200
years ago that the fairest way of funding transportation infrastructure
was user fees rather than general revenues: “When the carriages which
pass over a highway or a bridge, and the lighters which sail upon a
navigable canal, pay toll in proportion to their weight or their
tonnage, they pay for the maintenance of those public works exactly in
proportion to the wear and tear which they occasion of them.”
This
is not, however, how things were actually done. Powerful business
interests have used their political influence since the beginning of
American history to secure government funding for “internal
improvements.” The real turning point was the government’s role in
creating the railroad system from the mid-nineteenth century on. The
national railroad system as we know it was almost entirely a creature of
the State.
The federal railroad land grants included not only the
rights-of-way for the actual railroads, but extended 15-mile tracts on
both sides. As the lines were completed, this adjoining land became
prime real estate and skyrocketed in value. As new communities sprang up
along the routes, every house and business in town was built on land
acquired from the railroads. The tracts also frequently included
valuable timberland. The railroads, according to Matthew Josephson (The Robber Barons),
were “land companies” whose directors “did a rushing land business in
farm lands and town sites at rising prices.” For example, under the
terms of the Pacific Railroad bill, the Union Pacific (which built from
the Mississippi westward) was granted 12 million acres of land and $27
million worth of 30-year government bonds. The Central Pacific (built
from the West Coast eastward) received nine million acres and $24
million worth of bonds. The total land grants to the railroads amounted
to about six times the area of France.
Theodore Judah, chief
engineer for what became the Central Pacific, assured potential
investors “that it could be done—if government aid were obtained. For
the cost would be terrible.” Collis Huntington, the leading promoter for
the project, engaged in a sordid combination of strategically placed
bribes and appeals to communities’ fears of being bypassed in order to
extort grants of “rights of way, terminal and harbor sites, and . . .
stock or bond subscriptions ranging from $150,000 to $1,000,000” from a
long string of local governments that included San Francisco, Stockton,
and Sacramento.
Government also revised tort and contract law to
ease the carriers’ way—for example, by exempting common carriers from
liability for many kinds of physical damage caused by their operation.
Had
railroad ventures been forced to bear their own initial capital
outlays—securing rights of way, preparing roadbeds, and laying track,
without land grants and government purchases of their bonds—the
railroads would likely have developed instead along the initial lines on
which Lewis Mumford speculated in The City in History: many
local rail networks linking communities into local industrial economies.
The regional and national interlinkages of local networks, when they
did occur, would have been far fewer and far smaller in capacity. The
comparative costs of local and national distribution, accordingly, would
have been quite different. In a nation of hundreds of local industrial
economies, with long-distance rail transport much more costly than at
present, the natural pattern of industrialization would have been to
integrate small-scale power machinery into flexible manufacturing for
local markets.
Alfred Chandler, in The Visible Hand,
argued that the creation of the national railroad system made possible,
first, national wholesale and retail markets, and then large
manufacturing firms serving the national market. The existence of
unified national markets served by large-scale manufacturers depended on
a reliable, high-volume distribution system operating on a national
level. The railroad and telegraph, “so essential to high-volume
production and distribution,” were in Chandler’s view what made possible
this steady flow of goods through the distribution pipeline: “The
revolution in the processes of distribution and production rested in
large part on the new transportation and communications infrastructure.
Modern mass production and mass distribution depend on the speed,
volume, and regularity in the movement of goods and messages made
possible by the coming of the railroad, telegraph and steamship.”

The Tipping Point

The
creation of a single national market, unified by a high-volume
distribution system, was probably the tipping point between two possible
industrial systems. As Mumford argued in Technics and Civilization,
the main economic reason for large-scale production in the factory
system was the need to economize on power from prime movers. Factories
were filled with long rows of machines, all connected by belts to drive
shafts from a single steam engine. The invention of the electric motor
changed all this: A prime mover, appropriately scaled, could be built
into each individual machine. As a result, it was possible to scale
machinery to the flow of production and situate it close to the point of
consumption.
With the introduction of electrical power, as described by Charles Sabel and Michael Piore in The Second Industrial Divide,
there were two alternative possibilities for organizing production
around the new electrical machinery: decentralized production for local
markets, integrating general-purpose machinery into craft production and
governed on a demand-pull basis with short production runs and frequent
shifts between product lines; or centralized production using
expensive, product-specific machinery in large batches on a supply-push
basis. The first alternative was the one most naturally suited to the
new possibilities offered by electrical power. But in fact what was
chosen was the second alternative. The role of the State in creating a
single national market, with artificially low distribution costs, was
almost certainly what tipped the balance between them.
The
railroads, themselves largely creatures of the State, in turn actively
promoted the concentration of industry through their rate policies.
Sabel and Piore argue that “the railroads’ policy of favoring their
largest customers, through rebates” was a central factor in the rise of
the large corporation. Once in place, the railroads—being a high
fixed-cost industry—had “a tremendous incentive to use their capacity in
a continuous, stable way. This incentive meant, in turn, that they had
an interest in stabilizing the output of their principal customers—an
interest that extended to protecting their customers from competitors
who were served by other railroads. It is therefore not surprising that
the railroads promoted merger schemes that had this effect, nor that
they favored the resulting corporations or trusts with rebates.”

Reprising the Role

As
new forms of transportation emerged, the government reprised its role,
subsidizing both the national highway and civil aviation systems.
From
its beginning the American automotive industry formed a “complex” with
the petroleum industry and government highway projects. The “most
powerful pressure group in Washington” (as a PBS documentary called it)
began in June 1932, when GM president Alfred P. Sloan created the
National Highway Users Conference, inviting oil and rubber firms to help
GM bankroll a propaganda and lobbying effort that continues to this
day.
Whatever the political motivation behind it, the economic
effect of the interstate system should hardly be controversial.
Virtually 100 percent of roadbed damage to highways is caused by heavy
trucks. After repeated liberalization of maximum weight restrictions,
far beyond the heaviest conceivable weight the interstate roadbeds were
originally designed to support, fuel taxes fail miserably at capturing
from big-rig operators the cost of pavement damage caused by higher axle
loads. And truckers have been successful at scrapping weight-distance
user charges in all but a few western states, where the push for repeal
continues. So only about half the revenue of the highway trust fund
comes from fees or fuel taxes on the trucking industry, and the rest is
externalized on private automobiles.
This doesn’t even count the
20 percent of highway funding that’s still subsidized by general
revenues, or the role of eminent domain in lowering the transaction
costs involved in building new highways or expanding existing ones.
As
for the civil aviation system, from the beginning it was a creature of
the State. Its original physical infrastructure was built entirely with
federal grants and tax-free municipal bonds. Professor Stephen Paul
Dempsey of the University of Denver in 1992 estimated the replacement
value of this infrastructure at $1 trillion. The federal government
didn’t even start collecting user fees from airline passengers and
freight shippers until 1971. Even with such user fees paid into the
Airport and Airways Trust Fund, the system still required taxpayer
subsidies of $3 billion to maintain the Federal Aviation
Administration’s network of control towers, air traffic control centers,
and tens of thousands of air traffic controllers.
Eminent domain
also remains central to the building of new airports and expansion of
existing airports, as it does with highways.
Subsidies to airport
and air traffic control infrastructure are only part of the picture.
Equally important was the direct role of the State in creating the heavy
aircraft industry, whose jumbo jets revolutionized civil aviation after
World War II. In Harry Truman and the War Scare of 1948, Frank
Kofsky described the aircraft industry as spiraling into red ink after
the end of the war and on the verge of bankruptcy when it was rescued by
the Cold War (and more specifically Truman’s heavy bomber program).
David Noble, in America by Design, made a convincing case that
civilian jumbo jets were only profitable thanks to the government’s
heavy bomber contracts; the production runs for the civilian market
alone were too small to pay for the complex and expensive machinery. The
747 is essentially a spinoff of military production. The civil aviation
system is, many times over, a creature of the State.

The State and the Corporation

It’s
hard to avoid the conclusion that the dominant business model in the
American economy, and the size of the prevailing corporate business
unit, are direct results of such policies. A subsidy to any factor of
production amounts to a subsidy of those firms whose business models
rely most heavily on that factor, at the expense of those who depend on
it the least. Subsidies to transportation, by keeping the cost of
distribution artificially low, tend to lengthen supply and distribution
chains. They make large corporations operating over wide market areas
artificially competitive against smaller firms producing for local
markets—not to mention big-box retailers with their warehouses-on-wheels
distribution model.
Some consequentialists treat this as a
justification for transportation subsidies: Subsidies are good because
they make possible mass-production industry and large-scale
distribution, which are (it is claimed) inherently more efficient
(because of those magically unlimited “economies of scale,” of course).Tibor Machan argued just the opposite in the February 1999 Freeman:

Some
people will say that stringent protection of rights [against eminent
domain] would lead to small airports, at best, and many constraints on
construction. Of course—but what’s so wrong with that?
Perhaps the
worst thing about modern industrial life has been the power of
political authorities to grant special privileges to some enterprises to
violate the rights of third parties whose permission would be too
expensive to obtain. The need to obtain that permission would indeed
seriously impede what most environmentalists see as rampant—indeed
reckless—industrialization.
The system of private property rights .
. . is the greatest moderator of human aspirations. . . . In short,
people may reach goals they aren’t able to reach with their own
resources only by convincing others, through arguments and fair
exchanges, to cooperate.

In any case, the
“efficiencies” resulting from subsidized centralization are entirely
spurious. If the efficiencies of large-scale production were sufficient
to compensate for increased distribution costs, it would not be
necessary to shift a major portion of the latter to taxpayers to make
the former profitable. If an economic activity is only profitable when a
portion of the cost side of the ledger is concealed, and will not be
undertaken when all costs are fully internalized by an economic actor,
then it’s not really efficient. And when total distribution costs
(including those currently shifted to the taxpayer) exceed
mass-production industry’s ostensible savings in unit cost of
production, the “efficiencies” of large-scale production are illusory.